1
Aligning Performance Appraisals and Compensation Plans
Students Name
Institutional Affiliation
Professor’s Name
Date
2
Part 1: Management by Objectives (MBO) Performance Appraisal Method
For the Human Resources Specialist position at Acme Manufacturing, I recommend
using a Management by Objectives (MBO) appraisal method. Management by Objectives
(MBO) is a performance appraisal method that involves the employee and manager jointly
setting specific, measurable objectives that align with organizational goals. Management by
objectives (MBO) is a*strategic management model that aims to improve the performance of an
organization by clearly defining objectives agreed to by both management and employees.
According to the theory, having a say in goal setting and action plans encourages employee
participation and commitment and aligns objectives across the organization (Islam & Sarker,
2020). Thus, MBO uses objective standards to measure team members and company
performance. Objective standards outline what is fair, reasonable, or acceptable in an agreement.
You can use these standards to assess team member productivity and identify opportunity areas
within the team. MBO works because part of the MBO process involves management and team
members aligning and agreeing on these objective standards.
The MBO process typically includes the following steps (Dessler, 2020):
1. Objective setting: At the beginning of the review cycle, the manager and
employee meet to jointly define 3-5 specific, measurable, achievable, relevant,
and time-bound (SMART) objectives the individual will work towards. These
goals should align with overarching department and company priorities. Involving
the employee in goal-setting can increase their sense of ownership and
commitment.
3
2. Action planning: Once the objectives are established, the employee develops an
action plan outlining the key steps to achieve each goal. The manager reviews the
plan to ensure it is realistic and appropriately sequenced.
3. Periodic reviews: The manager and employee hold regular one-on-one meetings
throughout the performance period to discuss progress, identify obstacles, and
adjust goals or action plans as needed. The employee is expected to seek feedback
and support proactively.
4. Performance evaluation: At the end of the review cycle, the employee self-
assesses, rating their performance against each pre-set objective. The manager
completes a separate assessment, and then the two parties meet to compare their
evaluations. The manager provides specific examples to support their ratings,
focusing on job-related facts rather than subjective judgments.
5. Reward allocation: The final MBO ratings determine the employee's eligibility for
salary increases, bonuses, promotions, or other rewards. Higher ratings result in
more excellent payouts, creating a direct link between individual performance and
compensation (Islam & Sarker, 2020).
The concept of MBO is fundamental in terms of its managerial implications. Besides
being a philosophy of management, it is a system which helps synchronise the objectives of the
individuals with the objectives of the organization. MBO offers several advantages as a
performance appraisal method. First, MBO is a result-oriented process. Its primary focus is on
setting and controlling goals. Managers are encouraged to do detailed planning. They concentrate
on the critical task of improving performance by reducing the costs and harnessing the
opportunities. Improved planning will lead to improved productivity and more profits. This
4
increases transparency around performance expectations and evaluation criteria (Fischer et al.,
2020). Second, the participative nature of MBO can enhance employee motivation and goal
commitment. When individuals have a voice in establishing their objectives, they are more
invested in the process and likely to take ownership of the results (Islam & Sarker, 2020). Third,
regular manager-employee discussions keep performance on track and enable real-time
adjustments if business needs change. This is because, in MBO, there is improved
communication between the management and the subordinates. This continuous two-way
communication helps clarify any ambiguities, and refining and modifying any processes or
aspects of objectives. In addition, MBO provides a realistic means of analyzing training needs
and opportunities for employee growth. The management takes a keen interest in the
development of skills and abilities of subordinates. It provides an opportunity for strengthening
those areas which need further refinement, thus, leading to career development of employees
(Fischer et al., 2020). Lastly, there is no role ambiguity or confusion in the organization because
specific and clear goals are set for the organization, the division, for the departments, and the
individual members. The managers and the subordinates know what they have to do and what is
expected of them.
However, MBO also has potential drawbacks. Cascading organizational goals down to
the individual level and defining SMART objectives for each employee is complex and time-
consuming. Managers may need help to set appropriate targets, especially for roles that are
difficult to quantify (Islam & Sarker, 2020). If objectives are not well-crafted or sufficiently
challenging, MBO can lead to a bureaucratic, "check the box" mentality rather than incentivizing
true excellence (Fischer et al., 2020). An overemphasis on individual goals may hinder
collaboration and teamwork, as employees prioritize their accomplishments at the expense of
5
collective outcomes (Islam & Sarker, 2020). MBO also tends to focus on short-term, measurable
results, potentially missing essential behaviors and competencies needed for long-term success.
Ensuring Legal Compliance with MBO Instrument
To ensure the MBO appraisal process can withstand legal scrutiny, objectives must be
based on the job's essential functions as documented in a current job description. Evaluation
criteria should be clearly defined and communicated to all employees in advance. Managers must
apply the standards consistently across all individuals in a role, avoiding bias or exceptions.
Calibration meetings with other managers and HR can help ensure equitable treatment (Fischer
et al., 2020). Specific MBO policies and procedures should be outlined in writing, and all
employees should receive training on how the process works. Completed evaluations should be
treated as confidential personnel records, with access limited to the employee, their direct
supervisors, and HR. If an employee feels their assessment was unfair or inaccurate, there should
be a formal appeals process (Flynn, 2022).
Leveraging MBO for Compensation Decisions
The results of the MBO appraisal can directly inform decisions on merit increases,
incentives, and bonuses. Employees who consistently meet or exceed their objectives would be
eligible for more excellent pay raises to reward their high performance. For roles with an
incentive pay component, the MBO score can be used to calculate annual bonus payouts.
However, to ensure equitable pay decisions, MBO ratings should be supplemented with other
factors like external market competitiveness of current pay, internal pay equity within job grades,
and company budgets (Chen et al., 2023). Managers should also have the flexibility to
recommend rewards for employees who made substantial contributions not fully reflected in
their MBO results. By tying financial rewards clearly to MBO outcomes, the company sends the
6
message that meeting performance goals matters. This pay-for-performance link can boost
employee motivation to fully apply themselves toward achieving their objectives in alignment
with company success (Mahapatro, 2021).
Conclusion
In conclusion, Management by Objectives offers a structured approach to aligning
individual and organizational goals, enhancing performance and distributing rewards. While the
participative process can boost employee motivation and commitment, MBO has risks.
Significant time and training are required to establish clear, measurable objectives for each role.
An overemphasis on individual accomplishments may undermine teamwork and collaboration.
To ensure MBO programs are legally defensible, evaluation criteria must be job-related and non-
discriminatory, with consistent application across all employees. Rewards must be meaningfully
tied to performance, with ongoing monitoring to avoid adverse impacts. When designed
thoughtfully, MBO can be a powerful tool for driving results and differentiating top talent.
7
References
Chen, Y., Zhang, Z., Zhou, J., Liu, C., Zhang, X., & Yu, T. (2023). A cognitive evaluation and
equity-based perspective of pay for performance on job performance: A meta-analysis
and path model.*Frontiers in Psychology,*13, 1039375.
Dessler, G. (2020).*Fundamentals of human resource management. Pearson.
Fischer, M., Imgrund, F., Janiesch, C., & Winkelmann, A. (2020). Strategy archetypes for digital
transformation: Defining meta objectives using business process
management.*Information & Management,*57(5), 103262.
Flynn, B. (2022).*The Way We Work: Understanding the Relationship Between Executive
Coaching and Leader Well-Being in the Workplace*(Doctoral dissertation, Indiana
Wesleyan University).
Islam, M. A. R. H., & Sarker, R. I. N. K. (2020). The effect of management by objectives on
performance appraisal and employee satisfaction in commercial banks.*Journal of Social
and Development Sciences,*32(6), 4-23.
Mahapatro, B. (2021).*Human resource management. New Age International (P) ltd..
